Rosemary Frank* says financial decisions made during a divorce will impact the rest of your life, so it’s important not to settle for what seems easiest in the short term.
Photo: Kelly Sikkema
Divorce is an emotional crisis, but it doesn’t need to be a financial disaster.
Financial mistakes in the negotiations of a divorce settlement are sure to be costly to one party or the other.
The key is to understand what is best for you in the long run and not do what seems easiest in the short term.
You are about to make financial decisions that will impact the rest of your life.
Remember, your divorce attorney is not a financial expert.
Further, unforeseen consequences of a financial mistake can take several years to become evident.
But when they do, it is real.
Here are three financial mistakes to avoid when going through a divorce:
- Keeping the house
The most common, and potentially most damaging, mistake in a divorce settlement is for one of the parties to keep the house.
Too often, this is an emotional decision, rather than a financially sound decision, which can make you “house poor” — having a lot of house and little else to take to the supermarket.
Do a thorough analysis of what the house costs including maintenance, taxes, utilities and other items.
In addition, you will need to “buy out” your spouse’s share of the equity by either giving up other valuable assets or pulling more value out of the house in a refinance.
If you currently have a joint mortgage, or if it is in your spouse’s name, you will need to refinance anyway, but with a buyout, the mortgage will be higher.
- Not accurately calculating future expenses
Far too often, estimates of future living expenses are inaccurate.
Two can live almost as cheaply as one.
Therefore, two living separately becomes much more expensive all at once.
Unless you are currently living below your means, you should each expect your standard of living to decline somewhat.
Accurate expenses are critical if you will be negotiating spousal support, no matter which side of those negotiations you will be on.
If you have children, child support only goes so far.
It is important to consider that where the kids live, their friends will gather as well.
A few extra teenagers can consume your entire week’s groceries in a couple hours.
- Not being aware of the impact on taxes
Tax issues surrounding the financial aspects of divorce are often misunderstood or overlooked.
The areas most likely to be of concern are income taxes, capital gains taxes, and child-related deductions and tax credits.
Income tax obligations as single individuals (or head of household) will differ.
You and your former spouse are likely to be in different tax brackets.
Therefore, the terms of nearly every other financial issue may have different values to each of you.
Choose the right divorce financial consultant
Going through a divorce will force you to make the biggest financial decisions of your entire life at a time when you may feel the least capable of doing so.
Get the help you need.
Your divorce financial consultant should have two key qualifications.
First, they should be a licensed financial advisor, qualified and experienced in providing financial advice.
Second, they should have additional credentials as a divorce specialist, having studied, tested and successfully applied, in practice, the legal and financial particularities of divorce.
Further, buyer beware.
You do not want someone whose greatest qualification is that they themselves are divorced and like to do math.
They are not a financial professional.
You do not want a financial advisor who lacks divorce financial credentialing.
They are a generalist.
Use them for other needs.
You also do not want someone who will not charge you a fair market price for services in anticipation of managing your assets post divorce.
They cannot afford to give you all that you really need.
This is just a long sales process for them.
The right divorce financial consultant will help you get through your divorce in the most financially beneficial way and avoid costly mistakes during the difficult and financially confusing process.
The financial decisions you make during this time can impact you for the rest of your life, so it is important to make these decisions carefully.
* Rosemary Frank is the Principal of Rosemary Frank Financial.
This article first appeared at www.investopedia.com.
